Learning How to Budget Starts with Prioritizing

Due to lack of proper financial education, many Americans simply don’t know how to prioritize their monthly bills. Do you pay your electric bill before the mortgage? Do you pay your car payment before the payday loan? Or how about paying the Visa card before saving for property taxes?

Well, the first step to setting a budget is learning to pay what we call your 4-Walls before anything else.

The 4-Walls are basically your necessities in life and any other bills/expenses that must be covered every month! To simplify things we’ve just lumped them into 4 main categories: House, Food, Transportation, and Clothes.

Before we jump too far ahead, I want you to follow the diagram I’ve beautifully outlined for you. My artistic abilities are stunning…I know. No need to say anything.


If you’re a giver or tithe to your local church, then that amount SHOULD be added to your budget before you even get to the 4-Walls.

When you create your first budget, there are 5 steps that you need to take:

How To Budget Step #1:

At the top of a piece of paper simply write down your MONTHLY TAKE HOME PAY. The amount that gets deposited into your checking account (after taxes, insurance, etc.).

If you get paid every other week, or twice a month, then multiply your normal check by (2). If you get paid once a month, then this step should be pretty easy.

Important note and an area of confusion: If you get paid every other week, DON’T do what I see many people do: take (1) paycheck, multiply by 26 (because you actually receive 26 paychecks in a year, not 24 as I’m having you calculate for), and then divide that total by 12 (to get the net average for the 12 months of the year). If you get paid every other week, then there are ten months out of the year where you receive (2) paychecks and two months out of the year where you get (3). Therefore, the budgeting method that I teach will make sure your budget is correct in 10 out of 12 months. However, if you try to do what many people do (take the 26 pay periods and divide by 12) then your budget will be incorrect every month…hope all that makes sense.

How To Budget Step #2:

Next you must write down all of your necessities that you need to cover each month. The 4-Walls are very similar for most people, but what I’ve written down in my diagram are only common examples.

For now, you may have to guestimate on numbers such as groceries, entertainment, clothing, hair care/hygiene, and gas for the car. As you get started, guestimating is totally fine.

There may be other monthly obligations that you’ve agreed to (i.e. children’s activities, gym memberships, golfing, newspaper subscriptions, Netflix, cell phones, etc), and those need to be entered in this part of the budget as well.

It’s important to write down every monthly financial obligation you have. Once you get to the end of this process and the reality of your situation stares you in the face, you may have to sacrifice and cut back on certain things…but for now, just list everything you can think of.

How To Budget Step #3:

Total up all of the “necessities” and subtract that total from your MONTHLY TAKE HOME PAY.

What number do you come up with? Does it surprise or scare you? Is it less than you thought? Is the number negative?

If it isn’t what you expected, and more importantly, if your budget is negative at step #3, then come back for the fourth post of this series, as I will detail the ONLY THREE WAYS that you can increase this number.

When I teach people how to budget, the #1 key I’m looking for in this 3rd step is that the person’s budget is positive. That may seem obvious, but it’s not unusual for people to have a negative budget at this point.

IF there is money left after all of these payments and expenses are taken care of, that means that you’re living on less than you make – and that is a wonderful thing!

FACT: the only way to get out of debt is to stop going into debt, and if you’re not living on less than you make (at least covering the 4-walls section) then you’ll never get out of debt.

How To Budget Step #4:

Write down all of your debts and their MINIMUM monthly payments.

Once you’ve written them all down, total the minimum debt payments and subtract that from the number you got from How To Budget Step #3.

How To Budget Step #5:

If You Get a Positive Number:

If you have a positive number at the end of How To Budget Step #5 then that is great!

That means you can cover all of your necessities every month and pay all of your minimum debt payments! Do the Snoopy dance.

I realize I may not have answered any of your questions or concerns as of yet – we’ll get to those in the upcoming lessons. However, you can have peace knowing that on paper you just covered all of your monthly bills, living/lifestyle expenses, and minimum debt payments.

Notice that I said “on paper” you covered everything…well, the tough part now is actually executing it. That whole rubber-meets-the-road part is where things get a little tough and messy.

If You Get a Negative Number:

Step #5 is where I get the most resistance from people that are either (1) struggling with their finances, (2) have an extremely tight budget, or (3) have a negative number at this point or had a negative number after finishing step #3 (covering the 4-Walls).

What do you do if you can’t cover all of your minimum debt payments?

Well, you can do like most people and ignore reality.

A vast majority of people still pay all of the minimum payments on debt even though their budget is negative. If you choose to do this, you must understand that means you’ve effectively taken money away from some part of your 4-Walls.

You’re deciding that you’re going to pay your credit card/other debt, but not your mortgage, or a utility bill, or maybe put gas into the car. That’s really what it means…and there is no arguing that.

The Cycle of the Average American

The way some people get around this reality (without realizing they’re doing it) is they pay Visa their minimum payment each month, but then run out of money at some point in the month and find themselves using that same credit card (or another one – doesn’t matter) to pay for groceries, a bill, to eat out, or to put gas in the car.

This scenario is EXTREMELY common. It isn’t that you’re a bad person or that you’re failing your family…it’s really just how everybody in America manages money.

What this creates is a perpetual cyle of paying off some debt and going back into it. The end effect is an exhausting circle filled with frustration, headaches, chasing your tail, and a lack of progress.

You have to draw the line somewhere. If you don’t have the money to pay your minimum debt payments, then you can’t pay them (right now). Period.


Caution: There are some debts that can easily garnish your wages by simply calling your employer and requesting a garnishment. These debts include things such as back taxes, child support, student loans, and alimony. Most other debts have to go through a collection process and eventually can sue you if you don’t pay them (I will address this another day). So, in the event you owe taxes, child support, or student loan payments, you should do everything you can to pay them. Frankly, the debts that can easily garnish your wages should be considered a part of your 4-Walls.

Lastly, if your budget is negative, realize which debts fit in the category of ones that shouldn’t get paid. These are unsecured debts that I’m talking about: credit cards, unsecured personal loans, payday loans, medical debt, etc. Your car and mortgage are a part of the 4-Walls and they should have priority each month.

I’m not saying you shouldn’t pay your debt, because you should. The only way you can get out of debt is by paying it…so of course I want you to pay it.
However, if your budget is negative, then it means you can’t pay them right now. If you want to stop the never-ending cycle of going into debt (paying minimum debt payments each month) and going back into debt (by putting a 4-walls expense back onto a credit card), then you must draw a line and decide to end the madness.

Check back again later in the series and I will detail what options you have if you’re struggling meeting your minimum payments.

To Recap

There are two important things to look for in this initial step to creating a budget:

#1 – Do everything you can to ensure How To Budget Step #3 is positive. If that number is positive that means you have no reason to go into debt again, and it also means that you’re able to cover your bills and living/lifestyle expenses each month.

#2 – Ideally, How To Budget Step #5 will be positive as well. If that is the case then you have little to worry about other than actually sticking to what you’ve written down. If #3 is positive but #5 is negative, that means you’re covering your 4-walls but now you must figure out how to deal with your past (your debt) the best way possible – which I will discuss in part 4 of the series.

Well, now you know how to budget…or at least how to get one started. Next week I will take this budget a step further and help you with the 2 very important things: the #1 reason people don’t have money left at the end of the month, and the #1 reason people go into debt.

<< Previous | Next >>

About the Author

By , on Jan 19, 2012
Andy Tenton
Andy is a 30-something New Yorker who turned his financial life around. He took charge of his finances, got out of debt, and is now working his way toward financial success. He is the publisher of WorkSaveLive.com.

How to Become Rich e-Course

Budgeting 101

Leave a Reply

Your email address will not be published. Required fields are marked *

Disclaimer and Stuff

The articles are written by personal finance enthusiasts (not certified professionals) based on their personal experience. What works for them may or may not work for you, and you should always consult a financial advisor before making important financial decisions.

In accordance with FTC guidelines, we disclose that we have a financial relationship with companies mentioned in this website. This may include receiving access to free products and services for product and service reviews and giveaways.

Any references to third party products, rates, or websites are subject to change without notice. We do our best to maintain current information, but due to the rapidly changing environment, some information may have changed since it was published. Please do the appropriate research before participating in any third party offers.

For additional information, please review our legal disclaimers and privacy policy.